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Hungary: problems with the security trustee regulation?

The fact that the Hungarian legal system has now at last also recognized the concept of trust has been widely praised. The new Hungarian Civil Code, which entered into force on 15 March 2014, regulates the trust generally and also provides specific rules to the security trustee structure.

In international financings, if a syndicate of banks provides funds to the debtor, it is usually the security trustee which, being a member of the syndicate, holds in trust the security interest(s) established over the assets of the debtor on behalf of the other syndicate members.

At first glance, the Hungary's security trustee concept appears to function very similarly to the widely known concept that is generally utilized in international financings. Undoubtedly, such similarity was also intended to be achieved. Pursuant to the new Hungarian Civil Code, the security holders [sic!] may appoint in the security document or otherwise in writing any person or entity, either amongst themselves or an unrelated third-party, as security trustee. Such appointment must be registered with the registry in which the security interest is registered. Accordingly, only the trustee will be registered as the holder of the security interest.

The problem lies in the unfortunate wording of the new Civil Code with regard to its use of the term "security holders". Applying a strict interpretation, the term implies that the members of the syndicate must already hold a security interest when appointing the security trustee. In other words, all members of the syndicate must be party to the security document and appoint the security trustee (after this act only the security trustee will be registered, the other syndicate members will not, of course). This would certainly defeat the entire concept.

Unfortunately, it might well take several years until Hungarian courts establish interpretative practice on this issue. However, the courts can be expected to take a more relaxed interpretation that is generally compliant with the international practice concerning security trustees.